Daily Market Reports | Nov 19 2009
 By Greg Peel
The Dow closed down 11 points or 0.1% while the S&P dipped less than a point to 1109 and the Nasdaq was also only just in the red.
The rule of thumb is that a big up-day will only be confirmed if the second day following is also positive. The first day following is often a breather. This week we had a 136 point rally in the Dow on Monday, in which the Dow moved further into new high territory and dragged the S&P 500 into fresh blue sky as well – a normally bullish sign. Tuesday saw a 30 point gain which belied a stronger greenback and poor industrial production numbers, thus quite a good result. But to confirm a fresh bullish signal, Wall Street really had to go on with it last night.
Instead, the stock indices were mildly negative last night. A close of only down 11 on the Dow was not too bad, given the 10am low of down 77, but it is not the stuff of “onward ever upward”. What’s more, volume has become virtually non-existent as November has flowed on. Having booked returns of around 30% in the September quarter, following a similarly positive June quarter, hedge funds have decided to rest on their laurels. It would be a big call for the fourth quarter to kick further on from an already 60% rally. Why blow it?
Turning points nevertheless usually occur on strong volume, as panicked Johnny-come-latelies on the buy-side meet smart profit-taking on the sell-side. Weak volume is more the stuff of consolidation. Wall Street is now sitting back and contemplating the 60% rally to date and wondering what could actually take the market higher from here.
Another big fall in the US dollar would do the trick, but last night did see a fall in the dollar. Hello? What’s going on?
At 10am in New York, the US dollar index had fallen from its close on Tuesday at 75.31 down to 74.90 – a relatively solid drop. But this was also when the Dow hit its low for the day of 77 points down. On Tuesday both the dollar and stocks closed higher. On Wednesday, not only have the dollar and stocks both closed lower, but they both moved in concert all day. Yet for all of 2009 to date they have exhibited a near-perfect converse relationship.
It’s only been a couple of days, but the question must be asked: Are we now returning to “normal”? For all of 2009 the Fed funds rate has been held near zero, making the US dollar the world’s carry trade currency of choice. Borrow in US dollars and invest in any “risk” trade, from commodities to emerging market stocks to Aussie dollar bonds. How much risk is there? Money is virtually free.
And let’s face it – we’ve had a pretty good run. Stock markets are up 50-60% in the developed world and more in the developing world, metals and oil are up by even higher percentages despite leaving real demand behind long ago, and gold is at new highs having also left jewellery demand behind. The underlying factor has been apparent global economic recovery, including apparent recovery in the biggest economy – the US – as well. Normally when an economy is strong that economy’s currency is strong and vice versa. But not so the reserve currency in this case, given massive monetary stimulus which has flooded the world with oceans of greenbacks.
So let’s look at why both the US dollar and stocks fell heavily early in last night’s session.
The impetus was the October US housing starts number. For the last few months, housing starts have followed a flat trajectory, which has been a positive sign given the steep falls of 2008 and into 2009. Wall Street has taken the flat results to indicate a bottoming out. And broken down, starts of apartment blocks have continued to fall – no great surprise given the need for large amounts of credit – while single-family home starts have jumped to provide the offset, and to provide a good deal of hope.
The number of new housing starts for the past few months has hung around 590,000, and economists were expecting the October number to be the same. So when the result came out at 529,000, representing a sudden and unexpected drop of 10.6%, jaws also dropped. To add insult to injury, building permits, which indicate housing starts a month or two away, dropped by 4%.
Housing start levels are now back to where they were in April. They are not as low as the January nadir, but in 12 months are down 30.7% including single-family starts down 10.9%. April is Spring in the northern hemisphere – the peak time to look to buy or build a new house. And so much better when you come armed with a government grant from the fiscal stimulus pool. Now it is Autumn, and things are winding down for the winter. And although the government has now extended the grant period, most who wanted to take it up probably already have given they thought the expiry would be this month as originally planned.
It is understandable that the stock market should fall on this news. In recent times however, this would mean a bounce in the US dollar as risk trades are unwound. But last night the US dollar also fell. The bottom line is that Wall Street has been expecting the Fed would have to raise its interest rate if the economy appeared to be growing again (despite the Fed constantly suggesting it won’t), but if it appears the economy may be faltering again then there definitely won’t be a rate rise. So why buy the dollar?
This is “normal” stuff.
What it also means is that another leg up in the stock market is looking less and less possible. If stocks are not going to rally now on a weak greenback, what is left to drive them?
Last night also saw the release of the October CPI, which was up 0.3% on the headline and up 0.2% on the core. The difference is energy prices. The 12-month core CPI is down 0.2%, which is further confirmation for the Fed that inflation is not a threat and therefore low interest rates can stay for a long time yet.
The US bond market has been getting the message too. The ten-year bond yield pushed back over 3.5% a week or so ago when all talk was of a Fed rate rise, but it’s now slipped back to around 3.35% once more as rate rise fear subsides and bonds continue to look attractive against stocks in a balanced portfolio.
After their initial plunge, both the dollar and stocks recovered ground toward the end of the session. But not before gold had spiked to over US$1150/oz to mark a new high. Gold finished the day up US$5.50 to US$1144.30/oz and the US dollar index crept back over 75 to 75.18. The Aussie slipped slightly to US$0.9290, which is also interesting given the dollar index was net down on the day.
Real commodities also chopped around, finishing mostly back where they started. Oil was up US44c to US$79.58/bbl and continues to suggest US$80 is the cap. Base metals barely moved, bar nickel which was up 1.7%.
I raised the issue yesterday of the US economy potentially entering a “W” phase – not necessarily suggesting the second “V” of the “W” has to be as deep as the first, but a wonky “W” nevertheless. It now remains to be seen whether the stock market can hold on, with third quarter earnings now all but behind us and another Christmas approaching to test consumer confidence.
The SPI Overnight was up 8 points or 0.2%.
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